Thursday, May 27, 2010

This is the start of the end game of Credit Ponzinomics. When government entities which were thought to be nearly risk free for the past 50 years begin to default or “restructure” en masse, that is going to frighten the herd out of all sorts of markets. From an economics standpoint, the repudiation of debt is highly deflationary just as the assumption of the debt was originally inflationary. The money supply expanded when all that credit was offered/accepted and the money supply will contract when the associated debt either defaults or is paid back (more likely to be default because there is no means to pay back the debt).

What I sense from the big cities is that they already know they will go bankrupt. All they are worried about at this point is saving face. They don’t want to be the poster child for government bankruptcy which is what is going to happen to the first big guy who defaults. So Miami is just hoping LA will crash first and LA is hoping that Houston or New York City or any other big city will lead the way down. Once a couple of the big guys make the plunge then everyone will pile on. In fact, at that point only a fool would not pile on. Why? Because states won’t lose anything for doing it except their credit ratings which is like saying a homeless bum cares about his credit rating. The cities and states that are the first to wipe away their debt will be the first to recover.

You don’t want to be in any sort of municipal bonds right now IMO. Even if your city does not eventually go bankrupt the value on existing bonds will plummet as the risk premium – the interest rate – soars simply because another city in your state defaulted. Investors don’t know what the real books look like so they will sell first and ask questions later. The same is true for corporate bonds. Equities will meet the same fate. Anything with perceived risk, real or imaginary, is likely to be dumped. Cash is king (short term tbills are still considered cash for now). If you have the time right now might be a good time to re-read Conquer The Crash as it clearly explains all of these things that are playing out right now.

Tuesday, May 25, 2010

Looks like Bernanke is now looking to slough off blame for the impending crash which he knows will eventually happen when the market starts demanding higher interest rates on government debt due to fear of not being repaid.

Politicians generally prefer holding interest rates low, which stimulate the economy and hiring. Bernanke stated: "Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind inflationary pressures that worsen the economy's long-term prospects,"… "Thus political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation,"

OHhhhh, now I see, Bernanke. When the fed manipulates these things for its own reasons (i.e. enriching the banking elite of the country) then it is all sustainable and “something for nothing” is achievable. But when government puts pressure on the supposedly independent fed to actually perform the fed’s stated mission of doing the right thing for the rest of the country past the elite then all of the actions of the fed are really short term, unsustainable measures which actually WORSEN the economy’s long term prospects. Does this sound familiar? Where have we heard these words so many times before? How about Ron Paul, Peter Schiff, Bob Prechter and every other Austrian Economist on the planet!!

OK, did I get that right Bernanke? Well, let’s first see what the fed’s stated mission really is:

conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers

maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system”

How’s the fed doing?

Item 1 the fed says that it is supposed to influence credit conditions in pursuit of max employment and stable prices. Well, unemployment is at a multidecade high and home and paper asset prices are swinging wildly so I would say they failed badly at both of these.

Item 2 say they will supervise and regulate the banks in order to ensure safety and soundness of…. Well I had to stop there due to tears of laughter blurring my vision. The fed is an abject failure at this important goal.

Item 3 says it will contain systemic risk. Is that like saying “subprime will be contained”. It is another joke, another unkeepable Wimpy Promise made by the Ponzi operator in chief.

As for item #4, I am certain that before this crash is over they will have failed badly at that goal as well, especially the part about operating the nation’s payment system.

The fed is failing BADLY at 75% of its mission and so now Bernanke thinks its time to blame government. Is government to blame? Of course it is for all the reasons I have written about in the past. But if it were not for fiat currency and fractional reserve banking, both which are policies controlled by the federal reserve, government spending would be held in check by natural market forces. So at the end of the day it really is the federal reserve which is the disease that infects both government and private citizen today. The fed is a disease that we need to kill off by shining the light of day onto. This can only be accomplished with a full accounting of its books and back door deals. Bernanke is an actor, a shameless con man and liar playing a role.

Wednesday, May 19, 2010

For those not following the news closely, Arizona recently decided to tighten their immigration laws. Of course, most of the laws have been in place in one form or fashion at the federal level for a long time but Arizona has signaled in a very political fashion that it will get serious about enforcing them. After all, politicians are being told to “do something” about jobs and those immigrants are taking up all the American jobs, right?

I hate to keep quoting Prechter but he again called this type of behavior as one symptom of deflation. Basically, when the credit was expanding the money supply thus making the economy boom artificially, Americans (including Arizona residents) turned a blind eye to rampant immigration violations because, let’s face it, we enjoyed the low paid slave labor that illegals represented. illegals worked for low wages, paid sales tax on their consumption in the US and did not get unemployment or social security. Yes they took advantage of walk in emergency room services but it’s pretty clear that they traded their labor, their lives very cheaply to us. Fast forward to today and Americans suddenly have decided that a lot of work that used to be done mainly by illegals is no longer beneath us and so the illegals must be run off in order to open up jobs for Americans who will at least get minimum wage (and now health care benefits too). Prechter wrote years ago that there would be a rise in nationalistic mood and that it would negatively affect immigrants. Here is one example of the nationalistic writings that are floating around out there today: http://www.renewamerica.com/columns/weaver/100519

With all that in mind we are starting to see some very interesting inter-state dynamics. California, not content to be perhaps the most bankrupt state in the union, has become outraged at Arizona’s “new” laws to the degree that some of the cities, including Los Angeles, have voted to boycott Arizona commerce where possible.

At first glance I thought to myself that it is completely ridiculous that states boycott each other as we continue down the road toward a potential depression. What are these people thinking? Do they not care about their own economies? But then I read this part of the article:

“Among the contracts with Arizona companies that conceivably could be terminated include those for helicopter services, Taser guns, waste management, engineering and surveillance equipment. Hahn said "the best scenario" would be to turn around and give those contracts to California suppliers.

Ah ha. Perhaps this boycott business has little to do with morality and a lot to do with economic protectionism like the kind that many people believe underpinned the Great Depression. It seems to me that CA is trying to do to AZ what AZ is doing to immigrants: kick them out to make more jobs at home. Of course the whole thing is stupid and the consequences to CA will be very negative if they persist in playing the game. Perhaps AZ will just cut off the electricity to CA and tell them they didn’t want to accept IOUs in 2011 anyway…

All the talk about the “paradox of thrift” (i.e. blaming thrifty savers for the global financial crisis) and other smoke screen rhetoric is gone. The problem is and always has been debt. The only way to rack up these unsustainable levels of debt is through fractional reserve banking. PERIOD. If credit could not be conjured infinitely from thin air then high risk debtors would never be allowed to overextend themselves and creditors would never become big enough to be systemically risky.

Only a few quarters ago the focus was all about how bad the US banks were and Euroland seemed to be getting a free ride in the press. Back then I reported many times that I thought Euroland and Asia were both in very bad shape and likely even worse shape than the US. Not that the US banks are any good, most of the big ones are completely insolvent to the point where I have removed all of my money from them. They would have been shut down already if they were forced to do an honest accounting. But the US owns the world’s reserve currency still and that means the world is willing to extend us more credit to kick the can down the road further than it will do for Euroland or Asia. We are the lead Ponzi operator and we will be the last to really fall hard IMO.

Euroland just pledged nearly a trillion dollars to prop up their scam but the Euro is still falling. Ponzi theory suggests that as the Ponzi nears the collapse phase it takes more and more promises and guarantees to keep the system from collapsing and each round of promises has less effect than the last round even though the size of the promises continues to grow. This is because the Ponzi is based on faith and confidence and as the herd begins to lose confidence it becomes exponentially more difficult to instill confidence. Nobody in the herd wants to leave the watering hole too soon but everyone in the herd knows that the last to leave become breakfast for the lions.

Mauldin: Europe has 2 options: continue borrowing until nobody will lend anymore and then the fly hits the windshield or they voluntarily stop borrowing. Both he and Whalen think they will choose option 1. It doesn’t really matter because both avenues lead to a reduction in the credit portion of the money supply which is far bigger than the monetary base. Both avenues lead to the same result – depression and heavy handed government which tries to put down the civil unrest commonly associated with sudden poverty.

The suggestion from the interviewer that (paraphrased) “We’ve been kicking the can down the road for a long time and we seem to be OK” drew a round of laughter from Mauldin and Whalen. Make no mistake, we are on life support.

All of this is Austrian economics 101. For decades Keynesians suggested that we could kick the debt can down the road forever but there always comes a time in any Ponzi that the participants fear the Ponzi is going to be unable to pay them back the money that they put in and so they stop putting more money in, and worse, they begin pulling money out. Have we reached the “end game” of the Ponzi as Mauldin (formerly known as Mr. Muddle Through) suggests? I don’t know and neither does he but the data suggests that risk (…all you ever get when dealing with chaos are odds and probabilities…) of a global collapse has never been higher. In fact, the people seem to be actively driving it by electing people who are vocally against government spending which is a strong force propping up the Ponzi. That which most people think will lead to stability is actually going to hasten the inevitable demise of the Ponzi. Only after the Ponzi collapses will real stability be free to take place.

The good news in all of this is that the world does not suffer from shortages right now but rather credit driven overcapacity. We have an amazing abundant planet with amazing people and amazing technology. In other words, if people have to do without it isn’t because we don’t have the wherewithal to feed and clothe ourselves but rather because it would not be profitable to the people who have plenty of money that run the show. What this means is that a global financial rebalancing could go a long way to fix the problems pretty quickly and in fact that is likely the only way out of this mess. In the video, Whalen refers to the jubilee (which required that all property be returned to its original owners every 50 years) and suggested that inflation was the modern mechanism for doing this. In a credit driven economy, truly wealthy people are wealthy because others owe them money borrowed in order to create production capacity. But massive inflation wipes away debts on manufacturing equipment thus reducing actual production costs. Unfortunately, lots of people’s savings which are stored in fiat currency will be wiped out too. Remember, the dollar is a debt note and inflation wipes away debts of all kinds. Of course, there will be no inflation until the Great Deflation is allowed to play out and the faster and more severe it is allowed to happen the sooner we will emerge on the other side.

What I hope happens at the end of the day is that we get rid of fractional reserve lending and return to honest money where people get what they work for and where the stored fruits of their labor (retirement savings) are not at constant risk of evaporation if the monetary system collapses (something that can only happen if the money supply is fraudulent like fiat currency). We will know that we have such a system if innovators and producers, not bankers and bureaucrats, occupy the top rung on the societal ladder. That is obviously not going to happen overnight.

Monday, May 17, 2010

Social mood is clearly changing. For the past 30 years we have seen the growth of political correctness to the point that it became, in many cases, all that mattered. People with passion and substance and who dedicated to achievement were displaced or run off while bureaucrats, dripping with fake political correctness, thrived. If bureaucrats didn’t like the message from the achievers they would resort to passive aggressive ad hominem attacks. Since the masses were getting better than what they deserved from a credit engorged economy, they didn’t want change. They didn’t want to rock the boat so they stood by or even supported the rise of the bureaucrats.

But now the credit is ebbing and there is no more hiding the underlying insolvency. New Jersey is bankrupt just like Illinois and California and Florida and many other states. In California some months ago the people voted down all the tax increases put before them on the ballot. The people had had enough. The herd was turning. Then NJ elected Christie and he has been cleaning house in a way not seen for decades in that state. To get a feeling for the new mood, the new will of the people, the new direction of the herd, have a look at this short video where Governor Christie pushes back firmly on a reporter who suggests that Christie is offending people with his lack of fake political correctness:

Christie’s response is not mean or ill tempered. In fact, he mixes in a bit of well timed humor in there to really drive his point home. But he was not intimidated or in any way slowed by the accusation that he is too direct (not being politically correct) in his approach. If anything good is coming from this credit bust, you just got a taste of it in that video.

To me, the recovery is not real if we are effectively increasing the national debt at a record rate in order to fund it. It’s just a shell game where big corporations act like they are making profits in an open market but in reality their profits are ultimately being funded/stimulated by federal debt. There’s not much to do about it but ride the Ponzi train as long as its running. Just don’t be too surprised if the bridge is out ahead. In other words, play the Ponzi but don’t get in a position of relying on it. That, I think, is exactly what the smart money is doing. As we saw last Thursday on the Dow, the big money is ready to run for the exits at a moment’s notice.

Sunday, May 2, 2010

I have quoted Richard Russell of Dow Theory Letters fame many times over the past 3 years. The Seeking Alpha post below pulls a list of bullet points from Richard Russel’s paid subscription letter that I think are right on the mark:

I am currently in cash and gold. I lightened up a bit on gold over the past 6 months as a result of Prechter’s warnings that it could go down but I still hold a lot of it.

I do not think housing prices have seen bottom and I do think a lot of people have jumped in prematurely thinking the bottom is in. But how can this be a bottom if the government has been giving away thousands to people to buy houses and when it has been buying up more than 80% of the FHA loans over the past 12 months to the tune of 1.2 trillion? You can’t have a real bottom until the government gives up trying to stimulate the markets IMO. I do think there are areas where the bottom has hit like Detroit where you can buy some very nice properties for $5 a square foot. I do not expect the whole country to be Detroit but when I look at shoebox properties in CA going for 300-500k I still think there is a 50% haircut waiting for markets like that. Something we Americans just have to get through our heads is that the property is not worth what we paid, it’s worth what the next guy can pay and the next guy relies on credit to pay anything more that about 100k.

Regarding credit, Obama is doing some of the right things given that he is working within a corrupt system of fiat currency and fractional reserve lending, but his actions will be painful nonetheless. He is pushing for bank reform which is really to say he is looking to reduce the amount of fractional reserve lending that occurs. After throwing all the rules out the window he is trying to use the strength of a marginally improving economy to cut some of the cancer from the system. There is even recent and serious talk of breaking up many of the big insolvent banks like Citi, Bank of America, and JP Morgan Chase. But these offenders have big leverage out there so if they are broken up the leverage will have to be unwound and that means a big reduction in available credit: http://www.philly.com/inquirer/business/20100430_PhillyDeals__Should_Congress_break_up_Citi__Goldman__Morgan_.html

The commercial real estate market bust that everyone knows is coming hasn’t even hit yet. It’s a very likely tsunami yet we never hear about it in the main stream media.

The whole stock market rally since March of 2009 has been the Obama Hope rally. Nothing has really been fixed and a lot of things have been papered over in order to make things look better. Those problems are not going away. Government is just trying to buy time in the hope that things will magically work out. But people’s spending habits have not returned to the pre 2007 days and it will be many years before we see that again as boomers begin to hunker down for retirement.